You need to do your homework before you buy stocks. You want to find stocks that are of good value, especially if your goal is to hold onto your investment for some time. However, before you put your money into a stock, you need to review the stock’s fundamentals. You want to monitor its viability and see where it fits within your portfolio.
Purchasing stock is not a simple investment. You are becoming the part-owner of a company. As such, your investment decisions should reflect the interests of an owner. Here are some things you should consider before investing in a stock.
Evaluate Trends in Earnings Growth
The primary question to ask yourselves before investing in a company is, do you see a steady increase in profits over time? You don’t need to see explosive growth. But constant slight improvement over an extended amount of time is a positive indicator that the company is doing something right.
Evaluate the company’s financial reporting. You can find this information on a company’s investor relations website. Look at things quarter over quarter and then year over year. The goal is to see if revenues and earnings are going up or down.
If a company is showing positive growth, this indicates operational and financial stability. You also want to look at the steps the company is taking to increase its earnings. Does the company’s stock have a proven strategy to get new customers, produce new products, and increase sales? If so, it might be worth the investment.
Compare the Company to Its Peers
Identify growth potential. Look at the industry represented in the market. Looking at industries as a whole is a great way to screen stocks before looking at a particular company.
If it seems like the industry has potential for continued growth, then you can start to look at individual companies and their stocks within that industry. You want to see where the company fits into the big picture. How are they doing in comparison to their competition? What is their market share? Is there something that they are doing right that makes them stand out from their competition?
These are critical questions that can help you figure out if the company you are considering has the edge that makes investing in their stocks worthwhile. You want to make an apples-to-apples comparison. The companies you evaluate should have the same size market and capitalization. Look at their earnings and stock performance over the same period.
You should always check their annual report to see how their performance for the previous year was and the plans that they have for the company’s future. This will serve as a good indicator of stability and growth potential within the company. You will also want to read up on the current news. Sometimes there will be brand blunders that will be short-lived and the stock will go up again. Other times, however, companies will announce big financial impacts such as filing for bankruptcy. You will want to be up to date on the companies you are looking to invest in before making a decision on whether to buy or sell.
Consider How the Company Treats Dividends
A stable company with continuous growth tends to reward its shareholders with dividend payouts every year. However, be aware of a spike in dividend yield. A spike could indicate that the company is getting desperate for investors. Continuously high dividend payouts could also be a warning sign indicating that the company is not investing enough in itself.
Use Tools That Give You an Edge
It would help if you found tools that allow you to invest in the market according to your style. Long-term investors want tools that give them a long-term view of what a stock is likely to do. If you are looking to be a scalper who makes hundreds of trades each day, then a tool like NinjaTrader scalping indicator might be right for you.
Scalping stocks can be challenging because it is difficult to predict where the market will go. Scalping tools provide you with real-time analysis indicators that signal when is the best time to get in and when is the best time to get out of a deal.
Most investing tools are complicated. You will need a tool that provides powerful tutorials to educate you on how the tool works and how the market works as a whole. Trying to scalp stocks without the right tools will usually leave you with a higher loss than the win rate. Even if you analyze charts, methods, and time frames, going out on your own will cause you to miss opportunities.
Evaluate the Debt to Equity Ratio
Even if a company is massive, they are going to carry debt. Debt can indicate a company’s financial well-being. Stay away from investing in companies that have a high debt level relative to their equity. To find this number, divide their liabilities by the number of shareholder equity. If you have a low-risk tolerance, you are looking for a debt to equity ratio of 0.3 or less.
Make sure to evaluate the company you are interested in investing in with the S&P 500 Index. This will show you how they are performing in comparison to the rest of the industry.
Calculate the Price-Earnings Ratio
The Price-Earnings ratio will tell you whether a stock is overvalued or undervalued by the market. Take the company’s share price and divide it by its annual earnings per share; compare this value to the S&P 500 average. If you receive a low evaluation, consider whether it is deserving of that rating or if the market is undervaluing it. If it is undervaluing the stock then it may be the perfect pick for investment.
The Final Analysis
Investing in the stock market can be a powerful tool to help grow wealth. Pay attention to trends in earnings growth, company strength relative to peers, and debt to equity ratio. Make sure that you are using tools that can help you make wise investing decisions.